100% Offset Loan Structure
The structure of the 100% offset home loan makes it the ultimate flexible mortgage.
The offset mortgage sector is relatively new to the Australian mortgage industry but it is one of the fastest growing products on the market and borrowers are quickly realising the cash flow benefits it delivers.
Though initially offset home loans can be quite difficult to get your head around, borrowers who decide upon this type of mortgage can actually get the best of both worlds with this product: an efficient way to save money, and a way to save potentially thousands of dollars in interest payments in the long term.
If you are borrower who is disciplined about your finances and you have a mortgage on the property you live in, then this is a good option for you.
While there a number of offset mortgages available there are only a select number of lenders that will actually offer a 100% offset loan to their customers, and even fewer who offer it with a fixed rate home loan.
None of the major banks in Australia currently offer 100% offset on fixed rate facilities.
100% Offset Home Loan Structure
The fixed rate offset loan consists of a standard home loan account on a fixed rate (variable rate is also available) and an offset deposit account. The borrower is able to deposit surplus cash into the offset account and by doing so reduce the monthly interest payable on the home loan.
This is because the interest offered by the lender on the offset deposit account is the same as the interest you are paying on the home loan borrowing account. Therefore the interest earned on the monies deposited in the offset account offsets the interest payable on the home loan.
Interest on your home loan is calculated daily and, as a result, borrowers benefit as soon as they pay money into their offset account because they are only charged interest on the difference between the outstanding loan balance under their mortgage and the savings balance in their offset account.
The greater the savings are in your offest account, then the less interest you pay. Considering that your home loan interest is paid in after-tax dollars – the offset account structure delivers significant savings over the life of the mortgage and can cut years off your home loan term.
The mortgage and offset loan accounts remain completely separate, so borrowers are able to manage and spend their savings any way they like. A borrower can access funds in the offset account at any time.
Offset mortgages are tax efficient too. Under current legislation in Australia the interest ‘earned' in an offset account but used to offset interest payable on a home loan is not taxable. Under a 100% offset loan borrowers can actually save interest on their mortgage, by making their savings work as hard as possible for them.
Borrowers get a great return on their savings as opposed to leaving surplus money to sit idle in an unrelated savings account which as a general rule, will earn less interest than that which is payable on a mortgage loan.
If you have extra savings that you can put into a 100% offset account then you should seriously consider the benefits of this type of loan when refinancing a loan or purchasing a property.